Question 1

Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will

Accepted Answer

A)  allow a stable expansion of real income over time.
B)  be negated in the long run, through the economy's adjustment process.
C)  result in a price level lower than that preceding the demand shock.
D)  always reverse itself.
E)  set off an endless cycle of price rises and increases in unemployment. B

Question 2

A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the

Accepted Answer

A)  AS curve shifts to the right very rapidly.
B)  AD curve shifts to the left rapidly.
C)  AS curve shifts to the left only very slowly.
D)  AS curve shifts to the left fairly rapidly.
E)  none of the above-- the AS curve remains unchanged. D

Question 3

If the short- run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is

Accepted Answer

A)  experiencing an inflationary gap.
B)  at its full- employment level of output.
C)  experiencing a recessionary gap.
D)  operating at full capacity.
E)  threatened with an acceleration of inflation. C

Question 4

Which of the following statements about fiscal policy is the best example of "gross tuning"?

Accepted Answer

A)  The government decreases tax rates to decrease an inflationary gap.
B)  The government continuously alters its spending and taxing plans to hold real GDP at potential.
C)  The government uses automatic stabilizers to reduce any output gaps.
D)  The government cuts taxes to remove a large and persistent recessionary gap.
E)  The government increases its spending to reduce an inflationary gap.

Question 5

An economy may not quickly and automatically eliminate a recessionary output gap because wages

Accepted Answer

A)  have a tendency to rise too quickly.
B)  have a tendency to be sticky downward.
C)  never change in response to changes in the demand for labour.
D)  are flexible but prices have a tendency to be sticky downward.
E)  have a tendency to fall too quickly.

Question 6

A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the

Accepted Answer

A)  AS curve shifts to the left fairly rapidly.
B)  AS curve shifts to the right very rapidly.
C)  AS curve shifts to the right only very slowly.
D)  AD curve shifts to the left rapidly.
E)  none of the above -- the AS curve remains unchanged.

Question 7

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if

Accepted Answer

A)  households are not forward looking.
B)  the tax cuts stimulate private investment.
C)  firms are operating at their normal capacity.
D)  the marginal propensity to consume is large.
E)  the simple multiplier is large.

Question 8

In the long run, aggregate demand is _ for determining real GDP, and the paradox of thrift .

Accepted Answer

A)  stable and important; applies
B)  not important; applies
C)  not important; does not apply
D)  the most important influence; does not apply
E)  the only influence; applies

Question 9

Consider a simple macro model with demand- determined output. Which of the following parameters will produce the strongest automatic stabilizer?

Accepted Answer

A)  MPC = 0.7, t = 0.1, m = 0.4
B)  MPC = 0.9, t = 0.2, m = 0.4
C)  MPC = 0.7, t = 0.3, m = 0.2
D)  MPC = 0.8, t = 0.1, m = 0.2
E)  MPC = 0.8, t = 0.2, m = 0.3

Question 10

The Phillips curve describes the relationship between

Accepted Answer

A)  inflation and interest rates.
B)  aggregate expenditure and aggregate demand.
C)  unemployment and the rate of change of wages.
D)  the money supply and interest rates.
E)  the output gap and potential GDP.

Question 11

Following any AD or AS shock, economists typically assume that the adjustment process continues until

Accepted Answer

A)  the output gap is at a stable level.
B)  factor prices have returned to their levels previous to the shock.
C)  Y* adjusts to its long- run equilibrium level.
D)  the AD and AS curves intersect each other at the correct price level.
E)  real GDP returns to Y*.

Question 12

Which of the following statements about output gaps is true?

Accepted Answer

A)  When actual GDP is above potential GDP, there is upward pressure on wages.
B)  When actual GDP is above potential GDP, there is downward pressure on output prices.
C)  When actual GDP is above potential GDP, there is downward pressure on wages.
D)  When actual GDP is below potential GDP, there is upward pressure on wages.
E)  When actual GDP is below potential GDP, there is upward pressure on output prices.

Question 13

A recessionary output gap implies that

Accepted Answer

A)  there is excess demand for most factors of production .
B)  the intersection of AD and AS occurs where real GDP exceeds potential output.
C)  the economy's resources are being used at more than their normal capacity.
D)  the demand for all factor services will be relatively low.
E)  there is upward pressure on wages.

Question 14

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will

Accepted Answer

A)  decrease real output and leave the price level unchanged.
B)  leave real output unaffected and increase the price level.
C)  decrease real output and decrease the price level.
D)  decrease real output and increase the price level.
E)  increase real output and decrease the price level.

Question 15

Which of the following is a defining characteristic of the AD/AS macro model in the long run?

Accepted Answer

A)  the level of potential output is constant
B)  technology used in production is constant
C)  factor supplies are assumed to be fixed
D)  factor prices are assumed to be fixed
E)  changes in real GDP are determined by the changes in potential output

Question 16

Suppose Canada's economy is in a long- run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, _ . In the long run, _ .

Accepted Answer

A)  real GDP and the price level both rise; real GDP is above its original level with a higher price level
B)  real GDP falls and the price level rises; real GDP is below its original level with a higher price level
C)  real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
D)  real GDP and the price level both fall; real GDP is at its original level with a lower price level
E)  real GDP and the price level both rise; real GDP returns to its original level with a higher price level

Question 17

Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a _ in the price level and _ in national output.

Accepted Answer

A)  large increase; a small decrease
B)  small increase; a large increase
C)  large increase; a small increase
D)  large increase; no change
E)  small increase; a large decrease

Question 18

A recessionary output gap is characterized by

Accepted Answer

A)  rising prices.
B)  real GDP falling below potential output.
C)  constant prices.
D)  real GDP exceeding potential output.
E)  real output that varies one- for- one with aggregate demand.

Question 19

Suppose the economy begins in a long- run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short- run effect on real GDP reversed in the long run with a shift of _ .

Accepted Answer

A)  leftward; the aggregate demand curve
B)  rightward; the aggregate demand curve
C)  leftward; the aggregate supply curve
D)  rightward; the aggregate supply curve
E)  rightward; Y*

Question 20

In the basic AD/AS macro model, the "paradox of thrift" is only a short- run phenomenon because

Accepted Answer

A)  consumers base their consumption expenditures only on their lifetime income.
B)  the marginal propensity to consume is fixed in the long run.
C)  savings are transformed into expenditures in the long run.
D)  in the long run output is determined by potential output.
E)  consumers exhibit cyclical consumption behaviour.

Exam 24: From the Short Run to the Long Run: the Adjustment of Factor Prices